Momentum Trading

What is Momentum Trading?
It is a method of stock trading, where in a trade is made, when the stock is making a trending movement.

This may be intra day trade lasting for a few minutes or a swing trade or pattern breakout trade lasting for a few days. It all depends on which time frame you are analyzing your stock.

Taking a trade when the momentum is increasing is a high yielding in terms of time invested. Momentum is rate of change of price per unit of time. All stocks will show increased momentum, now and then, reacting to news and announcements, crisis, political changes, natural events, opportunities and threats.

How to take a momentum trade?

For a given news which side the stock moves is always uncertain. I have seen good results pushing the prices down.

So trend analysis is done to determine whether a stock is in an uptrend or in down trend. Always buy in an a bullish market and sell in a bearish market. This is the first step and is very important step because being in the wrong side of the trend when the momentum is picking is going to be disastrous.

Then recognize the momentum by using momentum indicators. My favorite momentum indicators are ADX, MACD & MACD Histogram, RSI and ROC.

With experience you gauge the momentum by looking at the slope of the Moving Averages also.

By technical analysis of charts patterns and study of indicators, one can enter the trade in the early phase of the momentum.

Momentum usually does not last longer. Exit the trade at the target price or when the momentum declines.

Mid cap stocks will exhibit a better momentum compared to large cap stocks.

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